Condo Coop HOA

A recent New York Appellate Division decision (Cortlandt Street Recovery Corp. v. Bonderman) underscores the significance of retaining experienced corporate counsel to protect both corporations and their board members from potential liability. The court rejected the plaintiff’s attempt to hold various related entities collectively liable for the actions of one, highlighting the complex challenges in navigating potential individual liability.

Understanding Alter Ego Liability

Attempts to “pierce the corporate veil,” or hold board members personally liable for corporate actions, require plaintiffs to prove two key elements:

1. Complete Domination: The plaintiff must show that an individual or entity completely dominated the corporation’s decision-making.
2. Fraud or Injustice: The plaintiff must demonstrate this domination was used to commit an act of fraud or perpetrate an injustice.

In considering domination, courts consider factors such as “the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership; officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the alleged dominated corporation; whether the corporations are treated as independent profit centers; and the payment or guarantee of the corporation’s debts by the dominating entity” (Tap Holdings, LLC v Orix Fin. Corp., 109 AD3d 167, 174 [1st Dept 2013] [internal quotation marks omitted])

How Corporate Counsel Protects Board Members

• Proactive Guidance: Experienced corporate counsel can proactively advise board members on best practices to maintain corporate formalities, ensure adequate capitalization, and avoid actions that could blur the lines between personal and corporate interests.
• Risk Assessment: Counsel can identify potential risks and help boards implement procedures to mitigate those risks, protecting board members from personal exposure.
• Defense in Litigation: Should a lawsuit arise, corporate counsel provides a robust defense strategy, working to shield board members from individual liability.

Key Takeaways

This decision reinforces the need for board members to prioritize working with competent corporate counsel. This proactive step is crucial to protect not only the corporation but also individual board members from the potentially severe implications of alter ego liability claims and personal liability for them where their own assets are at risk.

A recent Alabama court decision ruled the Corporate Transparency Act (CTA) unconstitutional, creating uncertainty for businesses nationwide. While the case may be appealed, here’s what boards of coops, condos, HOAs, and LLC members in New York, Connecticut and other states need to know right now.

On March 1, 2024, the Federal District Court in Alabama declared that the Act was unconstitutional. In the Judge’s words, the Act “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals.” As a result, the Judge found the Act to be unconstitutional because it exceeds the Constitution’s limits on Congress’ power. The Court, however, didn’t even reach a decision on whether it violates the First, Fourth, and Fifth Amendments. The Court permanently enjoined the government from enforcing the Act against the named plaintiffs and ordered a further hearing on the award of costs of litigation.

So, what is the rest of our Country supposed to do? We are going to have to wait and see what happens when, and if, the case is appealed to the Circuit court in Alabama and then possibly to the US Supreme Court. If we don’t hear more from the courts in New York, Connecticut and the other states, then compliance with the Act is still required. The case in Alabama only applies to the parties in that case and others in that District of Alabama right now arguably. Also the decision could be read narrowly, only applying the small businesses that are a part of the trade organization in Alabama that was involved in that lawsuit. Thus, most of the corporate entities that are covered by the Act, must still comply with the Act.

Next Steps:

• Stay Informed: Monitor legal developments regarding the CTA’s status.
• Review Your Status: Determine if your organization falls under the CTA’s reporting requirements.
• Consult Counsel: If unsure about your obligations, or considering a potential challenge, seek legal advice.

Here is an Article that we previously published on the CTA. Stay tuned for more.

In a recent New York case, 72 Poplar Townhouse, LLC v Board of Managers of the 72 Poplar Street Condominium, a series of critical issues arose that have wide-reaching implications for condo, coop, and HOA boards. This case highlights the potential consequences of unclear bylaws, the importance of meticulous records, and the complex power dynamics between unit owners and boards.

The Court refused to dismiss fraud and breach of fiduciary duty claims against the individual defendants board members who were sued. The Court explained: “The individual defendants’ submissions did not demonstrate, prima facie, that they did not breach their fiduciary duties as Board members by the unequal treatment of the plaintiff under the circumstances alleged. Nor did their submissions demonstrate, prima facie, that the amount of common charges refunded to the plaintiff was the correct amount, or that they did not know that the plaintiff was being overcharged to their benefit and to the detriment of the plaintiff. ”

Understanding the Case

• Conflicting Bylaws: At the heart of the dispute were two sets of bylaws with differing formulas for calculating common charges. The bylaws in the original offering plan conflicted with the bylaws that were ultimately recorded.
• Bylaw Amendment: The Board attempted to rectify the situation by calling a special meeting, where unit owners voted to amend the bylaws.
• Disgruntled Unit Owner: A unit owner, unhappy with this outcome, filed a lawsuit, alleging breach of contract, breach of fiduciary duty, and fraud.

Lessons Learned

1. Bylaw Clarity is Paramount: Ensure your association’s bylaws are drafted carefully and unambiguously. Ambiguities or conflicting provisions leave room for costly disputes.
2. Record-Keeping is Essential: Maintain thorough records of all board meetings, decisions, votes, and communications. Accurate documentation is crucial when defending board actions.
3. Seek Legal Counsel Early: Consult with an experienced attorney specializing in community association law to review bylaws, amend bylaws, and navigate conflicts to avoid potential legal pitfalls.
4. Understand Fiduciary Duty: Boards owe a fiduciary duty to act in the best interests of the entire association. Remember, decisions shouldn’t solely favor the board or certain members.
5. Consider Mediation: Before escalating disputes to litigation, pursue alternative dispute resolution, which can potentially save time and money for all parties involved.

The Bottom Line

The 72 Poplar Townhouse, LLC case underscores the need for condo, coop, and HOA boards to be proactive in their governance. By taking heed of these lessons, boards can build a more transparent, accountable, and less legally vulnerable association.

Here’s the decision for more information.